"Are companies with traded credit default swap (CDS) positions on their debt more likely to default? Using a proportional hazard model of bankruptcy and Merton’s contingent claims approach, we estimate the probability of default for U.S. nonfinancial firms. Our analysis does not generally find a persistent link between CDS and default over the entire period 2001-08, but does reveal a higher probability of default for firms with CDS over the last few years of that period.Further, we find that firms trading in the CDS market exhibited a higher Moody’s KMV expected default frequency during 2004-08. These findings are consistent with those of Henry Hu and Bernard Black, who argue that agency conflicts between hedged creditors and debtors would increase the likelihood of corporate default. In addition, our paper highlights other explanations for the higher defaults of CDS firms. Consistent with fire-sale spiral theories, we find a positive link between institutional ownership exposure and corporate distress, with CDS firms facing stronger selling pressures during the recent financial turmoil."

Recent Posts

Important disclaimer and information

Content published on DistressedVolatility.com is for informational purposes only and should not be construed as personal investment advice. Under no circumstances does information on DistressedVolatility.com represent a recommendation to buy or sell securities or derivatives. Topics discussed on this blog may carry a significant amount of risk and may not be suitable for all investors. Information will not be held liable for investment decisions made or losses incurred. Blog posts are strictly the personal opinions of the blog author. There is no guarantee that information, data, charts, or opinions are correct or accurate. Securities or derivatives mentioned on this blog may be owned by the blog author at any given time. Assume that the blog author is talking his/her book with full conflicts of interest. DistressedVolatility.com is not affiliated with any FINRA broker-dealer, registered investment adviser (RIA), mututal fund, hedge fund, or corporate entity. This blog is supported by advertising.